Friday, March 9, 2012
Relatively tight U.S. Soybean inventories and the potential for lower Soybean acreage this season may increase the potential for a rally in new-crop Soybean futures this season. One strategy to explore is the purchase of bull call spreads in November Soybean futures options. For example, with November Soybeans trading at 1292.00 as of this writing, he November 1300 calls could be bought and the November 1400 calls sold for 35 cents, or $1,750 per spread, not including commissions. The total investment in the spread would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid which would be realized at option expiration in October should the November futures be trading above 1400.00.
Grain futures trade was relatively quiet on Thursday, as many traders appeared to be squaring their positions ahead of this morning's USDA Crop Production & Supply/Demand report scheduled to be released at 7:30 am Chicago time. The following are pre-report estimates for the major grain products:
Corn: The expectation is that the USDA will lower U.S. Corn carryout totals to 784 million bushels, down 16-million bushels from the February estimate, as lower Corn production out of South America is expected to move more export business to the U.S. The production estimate for the Argentinean Corn crop is expected to fall to 21.3 million metric tons, vs. 22 million metric tons in February, though some analysts expect a further reduction in production due to drought conditions. Brazil's Corn production is expected to total 60.4 million metric tons, down 0.6 million metric tons from February's estimate. Though old-crop supplies are looking tight, price rallies may be moderated on the belief that we may see record U.S. Corn production this coming season, as Corn planting acreage is expected to rise to the highest levels since 1944.
Wheat: U.S. Wheat carryover is expected to drop moderately, and estimations are for the Wheat carryout to total 838 million bushels, which is down from 845 million bushels in February. The Wheat market continues to deal with a huge global supply, but some traders believe that U.S Wheat prices may have fallen low enough to become more competitive in the global export market. However, Russian Wheat prices remain lower than those of the U.S, so may garner a bigger share of business than would normally go to the U.S.
Soybeans: Similar to Corn, the South American Soybean crop is expected to decline sharply, with the Brazilian harvest expected to total 69.5 million metric tons, which is a sharp drop of 2.5 million metric tons from February's estimate. Argentina's Soybean crop is expected to total 47 million metric tons, down from 48 million metric tons in February. In the U.S., solid export business is expected force U.S. Soybean inventories lower, with many traders estimating Soybean carryout at 257 million bushels, down from 275 million bushels from February's estimate. Soybean prices, especially new-crop contracts, are expected to remain supportive, as traders believe that Bean prices may need to move higher to insure adequate planted acreage vs. Corn production in the U.S. this coming season.
Looking at the daily chart for November Soybeans, we notice the 20-day moving average (MA) crossing above the 200-day MA, which is normally viewed as a bullish signal. However, prices have traded near, but have not yet succeeded in breaking above resistance at 1300.00. The 14-day RSI has moved well into overbought territory, reading as high as 78.01 before turning lower, with a current reading of 71.69. Friday's USDA report may be the catalyst on whether prices finally break out to the upside, or if resistance at 1300.00 proves formidable and a much overdue price correction may occur. Support is seen at the 200-day MA currently near the 1264.25 area.
Mike Zarembski, Senior Commodity Analyst